Lawmakers tackle back tax grab

SACRAMENTO  Lawmakers announced legislation Tuesday to relieve the thousands of small business owners and investors directed to retroactively pay the state four years of assessments totaling $120 million plus interest.

The California Franchise Tax Board, citing a court ruling, last year invalidated a nearly 20-year-old tax incentive designed to spur investment in startup companies and small businesses. The tax board decision was estimated to affect about 500 small business owners and shareholders a year back to 2008, U-T Watchdog reported in January.

Sen. Ted Lieu, D-Torrance, and Assemblyman Jeff Gorell, R-Camarillo, want to unwind the decision and ban such retroactive directives from taking place in the future. They are backed by Board of Equalization Chair Jerome E. Horton, a former state lawmaker.

“The state is not going to get a windfall in taxes that the state should never have gotten in the first place,” Lieu said.

Senate Bill 209 will aim to undo the retroactive nature of the decision and ensure that no taxpayer is penalized for following the law in place at the time they made their financial decisions.

“The language will very clearly fix the problem that the FTB said they could not fix administratively,” Lieu said. “When you look at what the FTB says — even though I still disagree with them — they are not saying they don’t want to do this; they are saying they can’t do it.”

The court case at issue was brought against the Franchise Tax Board by Frank Cutler, an investor who sought to take advantage of the tax break but was denied because the law only gave consideration to small businesses with 80 percent of assets and payroll in California.

The Second District Court of Appeal held that the statute violated the commerce clause of the U.S. Constitution because it discriminated against out of state businesses.

The Franchise Tax Board took the case to invalidate the entire law — even for in-state businesses — and set about to collect back taxes from all who had partaken in the tax break.

Assembly Bill 1203 would prohibit state agencies from seeking penalties and interest when applying retroactive tax increases as a result of a court ruling.

“Retroactive tax increases for those small businesses that complied with the law and played by the rules is simply unfair and builds upon the perception that the state is hostile to business,” Gorell said.

Small business owners and investors, including Brian M. Overstreet, the founder of a San Diego-based company, formed the California Business Defense to lobby officials to reverse the decision.

“We are grateful to Sen. Lieu, Chairman Horton and Assemblyman Gorell for taking action to prevent this unfair retroactive tax grab from occurring, and look forward to working with them on obtaining passage of their bipartisan measure,” Overstreet said on Tuesday.